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CBS MoneyWatch: SEC Keeps Curtain Closed on Political Donations by Public Companies

The Securities and Exchange Commission (SEC) dropped from its agenda of regulatory priorities for next year any consideration of mandatory political contribution disclosures by publicly-held companies. The move is a significant change from last year when the topic was on the agenda under then SEC chair Mary Shapiro. Former prosecutor Mary Jo White became chair of the agency in April.

In combination with Internal Revenue Service regulations and a 2010 Supreme Court decision, the move almost completely closes the door on the public learning how corporations spend to influence politics. The push for regulations that would force corporations to disclose such spending was backed by labor, environmental, good governance and other groups.

"There really are few elements of the relationship between shareholders and portfolio companies that are more open to conflicts of interest than political contributions," said Nell Minow, co-founder, co-owner, and board member of GMI Ratings, which rates companies on corporate governance practices. "I can't think of another element of that relationship other than CEO pay where there's such a conflict of interest, and at least with CEO pay we get some data on it."

Washington's open secret: Profitable PACs

In the 2010 decision in Citizens United, the Supreme Court declared that the First Amendment, which protects freedom of speech and association, prohibited government restrictions on politically-related donations by corporations, associations, or labor unions that are independent of a candidate or political party. And although records of contributions directly to a political party are available through the Federal Election Commission, IRS regulations allow certain types of non-profit so-called independent organizations to accept donations without having to identify donors.

The combination of the ruling and the regulations means that corporations could put any amount of money they wish into political campaigns without their connections coming to light. Backers of last year's proposal hoped that an SEC rule would at least make public companies have to disclose details of what they were doing.

Jeff Corbin, CEO of KCSA Strategic Communications, an investor relations consulting firm, thinks the decision to drop the disclosure proposal was a good one. "To the extent that the SEC starts to require specific information that is not material [to a company's financial performance] to be disclosed, it is problematic," he said in an interview with CBS MoneyWatch. "I think it's a slippery slope. How do you decide what is important and what is not important [to disclose]?"

Traditionally, the SEC has focused on requiring disclosure that could affect a company's value and the price of its stock. However, Minow thinks that political spending can have considerable direct and indirect impact on corporate value.

There are cases where contributions backfire. For example, when Target (TGT) donated money to an "antigay" gubernatorial candidate in Minnesota, the result was a campaign to boycott the company. "All of the money Target had spent branding themselves as a gay-friendly company was at risk," Minow said.

There is also the potential for money donated to a group to be used in ways a company did not expect. "I was talking to a corporate secretary of a Fortune 100 company and complaining about opposition funding they were doing for a political candidate and they didn't know," Minow said. "They had given money to a lobbying firm."

Corbin thinks that any action should be market-based. "If I'm an investor, I have a choice. I can invest or I don't have to invest," he says.

However, if there is no record of the contribution, investors really don't have the option of weighing political donations in their investment decisions.